First things first…what exactly is a close corporation?
In 15 words:
A close corporation is a legal business entity which is separate from its individual members!
Here’s the longer version:
A close corporation is a separate legal entity from its members. The close corporation owns the assets of the business, as opposed to sole proprietors and partnerships, where the assets are owned in the individual’s capacity.
This means that the members of a close corporation – or CC as it’s commonly referred to – are not liable for its debts!
Or are they?
Yes and no! In this article let’s take a look at the ‘no’ side of the equation…
The takeaway here is that a court of law won’t protect the members of a cc (or the directors of a company for that matter) when it comes to breaking the law.
Here are some of the more pertinent sections of the Act:
Section 23 of the Act (Point 2) stipulates that the name and registration number of the CC must appear on all documentation. This is so that suppliers and customers are aware of the fact that they’re dealing with a CC!
This means that the members (or even the employees) who issued this document can be held personally liable for debts arising from its use.
Section 26 (point 5) of the Act states that should a CC be deregistered – while still owing monies – then the members are held personally liable for the debts of the CC.
Section 42 (Point 3) and 50 of the Act deals with member’s who are in breach of their fiduciary duty. A fiduciary duty means that the member should act with honesty, in good faith, and in the best interests of the CC. Any member in breach of this duty can be held liable for any losses suffered by the CC as well as economic benefits personally gained to the detriment of the CC.
Section 52 (Point 3) and 55 of the Act deal with loans made – or securities provided – to members, other CC’s, or companies wherein members have an interest, without the written consent of all the members of the CC. The member/s who authorised the loan, or who were party to it, must reimburse the CC for any loss suffered as a result.
Section 63 of the Act deals states that the members, along with the corporation, will be jointly and severally liable for the debts of the CC where:
1 – The name of the CC is used without the abbreviation CC. An example of this would be Insurancefundi instead of Insurancefundi CC!
2 – Any member fails to pay money (or to hand over property) to the corporation as his or her initial contribution to the CC.
3 – A juristic person or trustee of an inter-vivos trust holding a member’s interest in a close corporation and who is also a beneficiary of that trust
4 – The corporation acquires a member’s interest:
- without the written consent of all the remaining members,
- or where it results in the CC’s liabilities exceeding its assets,
- or If the CC is unable to pay its debts as a result of acquiring the member’s interest.
5 – The CC assists a person in obtaining a member’s interest:
- without the written consent of all the remaining members, or
- where it results in the CC’s liabilities exceeding its assets, or
- If the CC is unable to pay its debts as a result of acquiring the members interest.
6 – Any member partaking in the management of a CC and who is disqualified as a result of:
- Being an unrehabilitated insolvent
- Having a theft, forgery, fraud, or perjury conviction
7 – The position of accounting officer is vacant for a period of six months
Section 64 of the Act deals with liability resulting from the reckless or fraudulent carrying on of the business of the CC. Any person who was knowingly party to this reckless or fraudulent activity can be held liable for debt and is guilty of an offence.
Section 65 of the Close Corporations Act entitles the courts to lift the ‘corporate veil’ when it comes to the “gross abuse” of a CC as a separate legal entity apart from its members.
An example of this is the actual case of Mr Meat Man – Haygro catering BK v Van der Merwe en andere 1996 (4) SA 1063 (C)…
Mr Meat Man didn’t pay for a meat delivery. The supplier then issued a summons only to discover that Mr Meat Man wasn’t a partnership as originally thought, but rather a close corporation!
Since the CC’s name and registration number did not appear on any documentation, and the supplier unaware of the fact that he was dealing with a CC, the courts found the so-called ‘partners’ liable for payment of the debt.
Forgive me if I missed anything…but there you have it!
A close corporation isn’t quite the safe haven it’s often thought to be.
It demands from all its member’s a familiarity with the Close Corporations Act…so don’t say we didn’t warn you!
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The InsuranceFundi Team
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